Sterling struggles for direction as Iran talks at impasse

By Samuel Indyk

LONDON, June 3 (Reuters) - The British pound was little changed against the dollar and euro on Wednesday, with investors remaining focused on the conflict in the Middle East, and the impact a prolonged war would have on monetary policy. 

Talks to end the war remain at a stalemate, while hostilities flared again on Wednesday as an Iranian missile attack damaged Kuwait's airport and the U.S. military carried out strikes near the Strait of Hormuz. 

That pushed up oil prices on Wednesday, with Brent crude futures trading at their highest level in a week. 

Britain’s greater reliance on imported energy leaves it more exposed than the United States to higher global fuel costs. While prices have eased from their late April highs, they remain significantly above their levels before the U.S.-Israeli attacks on Iran on February 28 that ignited the war.

The pound was last down about 0.1% against the dollar at $1.3447, within the middle of its recent range. 

Against the euro, sterling was little changed at 86.34 pence. 

BOE RATE HIKE PUSHED BACK

Investors are betting that the Bank of England can wait before hiking rates and have lowered expectations for future hikes from the start of the war.

Money market futures are not fully pricing in a quarter-point rate hike until the September meeting, while just under two hikes are priced by the end of the year.

"The market has given the Bank of England a window to wait this out, as long as the Strait (of Hormuz) opens pretty soon," said Gustav Helgesson, macro strategist at SEB.

"Obviously it will depend on what happens with underlying inflation, but as long as we don't see any big surprises there, the Bank of England could sit this out and, from a rate-differential perspective, this should weaken the pound."

If there was an end to the war, it could also ease pressure on the public finances, which could act as a positive for sterling, Helgesson added.  

In contrast to the BoE, the European Central Bank is widely expected to raise interest rates when it meets next week, while investors are starting to bring forward their expectations for rate hikes from the Federal Reserve given recent resilient U.S. data and growing price pressures.  

(Reporting by Samuel Indyk; Editing by Alex Richardson)